Speaking at the 2018 National SMSF Conference, ATO deputy commissioner James O’Halloran had a few things to say about where the regulator was sharpening its focus on the SMSF sector.
In a broad-ranging speech, O’Halloran acknowledged the “significant role SMSFs play within the Australian financial sector,” noting they now represent 27% of assets held in super. “So by any measure,” he said, “the SMSF sector is a key part of the Australian super and retirement landscape.”
He also mused on the particular role the ATO plays in the SMSF space, saying that it doesn’t act as a prudential regulator but instead aims to “protect the integrity of the sector” by “[addressing] behaviour that seeks to take advantage of the closely-held and concessionary nature of an SMSF, or which seeks to undermine the retirement system by accessing savings in circumstances not allowed under law.”
Here are the behaviours he said the ATO will be “closely scrutinising” in the coming years:
Using multiple SMSFs to circumvent tax laws …
O’Halloran said the “use of multiple SMSFs to manipulate tax outcomes” has become an emerging problem since the introduction of the total super balance (TSB) and transfer balance cap (TBC) in July 2017. While he acknowledged legitimate reasons for multiple SMSFs – blended families, differing investment strategies and so on – it was clear the ATO would be paying much closer attention to these structures in the future.
By the ATO’s estimation, there are about 13,600 trustees with more than one SMSF, and 35 trustees with more than five.
“Given the recent introduction of the TBC and disregarded small fund assets provisions,” he explained, “we will closely scrutinise arrangements where an individual with multiple SMSFs acts within these funds to circumvent the intended outcomes of these measures.”
He continued: “For example, if the individual repeatedly switches between accumulation and retirement phase in these funds to ensure that large gains and income are always incurred by assets in the retirement phase, achieving a greater effective tax exemption than would ordinarily be available.”
… as well as reserves
O’Halloran also said the ATO would be paying close attention to SMSFs using reserves so as to “circumvent restrictions in the super and income tax legislation.”
He pointed to the 1,900 SMSFs which reported a total of $375 million in reserves in 2016-17. Of these, 35% had not previously reported reserves, and to date, “‘new’ reserve amounts equate to approximately $65 million, with the average value of these ‘new’ reserve amounts equalling $95,000.”
Because of this, he said particular events would attract scrutiny: any unexplained increase in new reserves, increases in balances of existing reserves or allocation of amounts from a reserve directly into the retirement phase. This wouldn’t just be forward-looking, either; the ATO will be “looking to examine the more recent return data from the 2016–17 financial year to see any trends post the introduction of the TBC.”
To ensure SMSFs are compliant with the SIS Act, he said trustees should carefully review this bulletin which contains the “limited types of reserves identified … as being appropriate in an SMSF.”
Market-linked pensions
O’Halloran also noted there were circumstances where, since the TBC’s introduction, market-linked pensions had been commuted after July 2017 – resulting in “a transfer balance debit of nil.”
“Where the individual then starts a new market-linked pension,” he continued, “this may cause them to exceed their TBC … The government does recognise the unintended consequences associated with the current law and is committed to ensuring smooth implementation of the 2016–17 super tax changes.”
As a result of this, he said the ATO won’t be focusing as strongly on this issue compared to the other two. He said the regulator’s compliance approach “will be not to take compliance action at this stage if a fund doesn’t report the transfer balance account events of the commutation or the start of the new market-linked pension.”
It’s perhaps unsurprising that the ATO is taking these steps now, given both the size of the SMSF sector and the ways in which it’s been reshaped by legislative changes over the past few years. If you have clients with SMSFs – or even have one yourself – it’s important to keep abreast of how the regulator is sorting its priorities to remain compliant.
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